Income statement reverse

Now that you ve articulated some basic assumptions, the next step is to determine the amount of profit (not revenue) you want to generate as a direct result of your innovation. Determine the profit margin and amount of profit that would make the project worthwhile. Then, use a reverse income statement to calculate how much revenue you would need to reach this profit after subtracting your initial investment and any ongoing costs. 

Pikes Peak Coffee, for example, hopes that adding a unique, healthy breakfast offering to its menu will net them an additional 1.8 MM profit annually across their 32 locations. A reverse income statement (Exhibit 11.3) shows that to meet this goal, annual revenue from the new offering (before costs) needs to be 4.6 MM. 

A reverse income statement models the basic economics of the proposed innovation based on projected profit, not revenue. 

After compiling the estimated operational costs, update the income statement (Exhibit 11.5) to see if your initial profit projections are still on target. For our coffee shop example, total costs will likely be less than predicted on the reverse income statement, which increases the amount of projected profit. Of course, had the pro forma operation specs predicted higher costs than the initial estimate. Pikes Peak Coffee would need to either reduce costs or increase revenue projections. 

It is in the preparation of operations specifications (item 2 above) that the technique adds value for supply chain management. Here, planners must explain their assumptions regarding distribution, production, and marketing costs within the constraints provided by the reverse income statement. The following paragraphs briefly describe the process. 

The income statement establishes the viability of the product in business terms. It is reverse because one starts with the required profit from the product. This is a foundation principle of discovery-driven planning. It requires that product strategists have such a goal in mind as they authorize products for development. Planners, using the profit objective, work backward to the required costs and revenues. In doing this, they will arrive at supply chain cost limits for manufacturing, materials, and distribution. 

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